Planning to buy life insurance? Wait till October

Have you recently received an email or SMS, asking you to hurry up and buy a life insurance policy before October? If yes, then don’t pay heed.

Messages such as these are doing the rounds and claiming that policies bought after October will come with fewer benefits. In fact, Mint Money is privy to one such email correspondence from an agent with the Life Insurance Corp of India (LIC). The email claims that LIC will withdraw all its plans by September 30 and will re-launch new plans with fewer benefits.

The truth, however, is quite different. From October, the Insurance Regulatory and Development Authority’s (Irda) new product regulations will kick in, making the design of insurance policies a tad better.

What works for you?In 2010, unit-linked insurance plans (Ulip) went through significant reforms, so there’s no change on that front. But post-2010, the industry moved to traditional plans. Traditional plans, too, invest your money, but unlike in a Ulip, here the returns are not market-linked and the costs are not disclosed; returns either come in the form of annual bonuses or are guaranteed upfront. It is these plans that will look different from next month. Here are the two big changes that will work for you.

Better surrender value: If you decide to exit your policy mid-way, you will be entitled to a higher surrender value under the new rules.

Right now there aren’t fixed rules, but usually you don’t get any money back if you surrender your policy before paying premiums for three years. After three years, the policy gives a residual or surrender amount that is usually 30% of all the premiums paid minus the first-year premium.

From October, your eligibility for getting a surrender value will depend on the premium paying term that you choose. If your premium paying term is less than 10 years, then you become eligible for a surrender value after paying premiums for two years. For tenures more than 10 years, you become eligible after paying premiums for three years. In this case, the minimum guaranteed surrender value will be 30% of all the premiums paid. From the fourth year onwards, the minimum guaranteed surrender value will increase to 50% of all the premiums paid until the seventh year. Thereafter, insurers will have to file a surrender value with the regulator.

“The surrender value under the policy will increase gradually over the policy term with surrender value being at least 90% of the premiums paid during the last two policy years,” said V Viswanand, director and head, product solutions management, Max Life Insurance Co. Ltd. This is the minimum guaranteed surrender value that the insurer will have to pay.

On top of that, insurers can also give you a higher special surrender value. “Special surrender value varies with the overall investment experience and it’s greater than or at least equal to the minimum guaranteed surrender value,” said Viswanand. Special surrender value begins to swell up only as the years progress, so surrendering your policy early may only leave you marginally better.

Higher death benefit: So far, traditional plans have no rules on the minimum sum assured that insurers need to offer on a given premium. This rule was dictated more by the tax benefits insurance policies were eligible for. Till FY12, insurance policies with a sum assured of at least five times the annual premium were eligible for tax benefits. From FY13, this changed to a sum assured of 10 times the annual premium.

Now even Irda has mandated that the minimum sum assured or the death benefit on a life insurance policy shall not be less than 10 times the annual premium for individuals below 45 years of age. But for policies with tenures of less than 10 years, the sum assured limit has been reduced to five times the annual premium. That said, at any point the death benefit will have to be at least 105% of all the premiums paid till date.